MBA 3rd Sem.

Unit-3 Security Analysis and portfolio Management (SAPM)

LECTURE NO: - 19

CONCEPT, OBJECTIVES AND BELIEFS

Fundamental Analysis: Concept, Objectives and Beliefs

What is Fundamental Analysis?

In accounting and finance, fundamental analysis is a method of assessing the intrinsic

value of a security by analyzing various macroeconomic and microeconomic factors. The
ultimate goal of fundamental analysis is to quantify the intrinsic value of a security. The
security’s intrinsic value can then be compared to its current market price to help with
investment decisions.

Note:- Intrinsic value of a stock is its true value. This is calculated on the basis of the
monetary benefit you expect to receive from it in the future.

Which are the Best Fundamental Analysis Tools?

Tools for Fundamental Analysis can include everything that is present and can be derived
from the financial statements, management discussions, and business plan as you read
above.

However, few financial tools are favorites of the analysts for this research. They are –

1. Earnings Per Share Or EPS:

Two of the basic financial information – one is earning of the company and the other is
the total number of shares of the company but none of these two can individual tell you
about the company’s performance.

But when you combine these two, it becomes one of the powerful tools for financial
analysis. It is one of the most popular ratios which tells you about the company’s profit
share for each of the stock.

EPS is calculated by dividing the net income or income after deducting dividends on
preferred shares by the total number of outstanding shares of the company.

2. Price to Sales Ratio

It is used to recognize the price of the stock as compared to the revenue. It helps you
understand the growth of the share price against the revenue generated in that year.

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Dr. Pramod Gupta, Professor-MBA Department-MITRC
MBA 3rd Sem. Unit-3 Security Analysis and portfolio Management (SAPM)

3. Price to Earnings Ratio

It is derived by dividing the price of the shares in the market (current sale price) by the
earnings per share.

4. Price to Book Ratio or P/B Ratio

It is another important ratio that gives you an idea about the company’s stock price
compared to its asset. It is also known as Price to Equity Ratio. P/B Ratio is derived by
dividing the latest closing price of the share by the book value of each share.

5. Return on Equity
It is derived by dividing the net income of the company by shareholder’s equity. It gives
you the return generated on the equity of the company.

6. Dividend Payout Ratio

It gives you two important information – one is how much dividend is paid to the
shareholders out of the profit of the company. Second is retained earnings of the
company.

Apart from these few, there are many financial ratios and other tools which are used in
Fundamental research.

What are the Objectives of Fundamental Analysis?

The objectives of Fundamental Analysis of Stock Market are –

• To predict the future price of the share of the company

• To do the valuation of the asset of the company
• In order to project the performance of the business
• To measure the credit risk
• To evaluate the management’s decisions
• In order to find the intrinsic value of the asset

Pros of Fundamental Analysis

The Fundamental Analysis Benefits are –

• It helps in predicting the long-term trends in the market. It is generally used for long-
term investment as it can help you understand the future price of the stock.
• Fundamental Analysis helps you find good companies for investment. The company’s
have the potential to grow in the future.

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Dr. Pramod Gupta, Professor-MBA Department-MITRC
MBA 3rd Sem. Unit-3 Security Analysis and portfolio Management (SAPM)

• It helps in analyzing one of the most important but intangible factors that are Business
Acumen. It is highly beneficial in investment analysis as it can tell you about the future
of the business.
• Fundamental Analysis helps you understand the economy, industry, and then the
company which helps you wisely predict the price knowing all the risks and rewards
of your investment.

Criticisms of Fundamental Analysis:-

There are few Fundamental analysis Criticism as well and they are –

• It is time-consuming. For conducting fundamental research, you need a lot of time.

Accumulating all the information from the business plan to the financials and finding
out ratios and analyzing and reading each of the reports takes a lot of time which may
defer the investment on time.
• In fundamental analysis, it is important to research as per the industry or the
company. Your approach needs to be different for each of the company and industry
and that is difficult to understand which approach to be adopted.
• The valuation is based on financials provided by the company itself. It can be biased
as the company can alter its financials to increase or decreased its share prices.

References: -

• Prasannachandra, Investment analysis and Portfolio Management, Tata McGraw

Hill, 2008.

• V. A. Avadhani, Securities Analysis and Portfolio Management, Himalaya Publishing

House, 2008.

• V. K. Bhalla, Investment Management, S. Chand & Company Ltd., 2008

• S. Kevin, Securities Analysis and Portfolio Management, PHI Learning, 2012.

75
Dr. Pramod Gupta, Professor-MBA Department-MITRC
MBA 3rd Sem. Unit-3 Security Analysis and portfolio Management (SAPM)

LECTURE NO: - 20

ECONOMIC ANALYSIS
Economic Analysis of Securities/ Stock: -

ECONOMIC ANALYSIS

The stock market does not operate in a vacuum. It is an integral part of the economy of a
country, more so in a free economy like the United States of America and to some extent
in a mixed economy like India. After the new liberalised economic policy implementation,
say after 1991, India is also emerging as a free economy. To get an insight into the
complexities of the stock market, one needs to develop a sound economic understanding
and be able to interpret the impact of important economic indicators on stock markets.

76
Dr. Pramod Gupta, Professor-MBA Department-MITRC
MBA 3rd Sem. Unit-3 Security Analysis and portfolio Management (SAPM)

References: -
• Reilly & Brown, Investment Analysis and Portfolio Management, Cengage Learning,
10th edition, 2016.
• S. Kevin, Securities Analysis and Portfolio Management, PHI Learning, 2012.

77
Dr. Pramod Gupta, Professor-MBA Department-MITRC